CyrusOne Inc

Good morning and welcome to the CIRES I First Quarter 2021 Earnings Call. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the call over to Mr. Michael Schaefer, VP of Capital Markets and Investor Relations. Please go ahead.

Thank you, Nick. Good morning, everyone, and welcome to Cyrus One's first quarter 2021 earnings call. Today, I'm joined by Bruce Duncan, President and CEO, Catherine Motlock, CFO, and John Hatem, COO. Before we begin, I would like to remind you that our first quarter earnings release, along with the first quarter financial tables, are available on the investor relations section of our website at cyrusone.com. I would also like to remind you that comments made on today's call and some of the responses to your questions deal with forward-looking statements related to CIRAS 1 and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are detailed in the company's filings with the SEC, which you may access on the SEC's website or on ciras1.com. We undertake no obligation to revise these statements following the date of this conference call. except as required by law. In addition, some of the company's remarks this morning contain non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the investor section of the company's website. I would now like to turn the call over to our president and CEO, Bruce Duncan.

Thank you, Michael, and welcome to Cyrus One's first quarter earnings call. I want to begin by by acknowledging and thanking our team for their tremendous effort during the winter storm that impacted Texas in late February, keeping our data centers operational and taking care of our customers. While it was a very difficult week for many throughout the state, the expertise, dedication, and hard work of our people helped us manage through these unprecedented circumstances. Now, turning to the quarter, beginning with slide four, despite the negative impact of higher electricity rates in Texas due to the storm, we had good financial results, which Catherine will discuss in more detail shortly. We also had a good leasing quarter, signing approximately 28 megawatts, totaling $35.4 million in annualized GAAP revenue. primarily driven by bookings from hyperscale customers in our U.S. markets. We ended the quarter with a record backlog of approximately $113 million, positioning us well for continued growth this year and beyond. Moving to slide five, we completed construction on developments in the New York metro area and Frankfurt. totaling approximately 78,000 colocation square feet and 14 megawatts. Our development pipeline, as of the end of the quarter, consisted of projects across the U.S. and Europe, totaling approximately 380,000 colocation square feet and 100 megawatts, with 69% of the square footage under development pre-leased. We are also excited to announce the execution of an agreement to acquire a 12-acre development site in Frankfort to support growth in one of our leading markets. We continue to maintain a strong balance sheet with low leverage and significant liquidity to fund our growth, including $385 million in available forward equity. Slide 6 provides detail on our leasing results for the quarter, as well as the revenue contribution across our portfolio by industry verticals as of the end of March. Our hyperscale customers accounted for 79% of the annualized GAAP revenue signed during the quarter, with the lower average pricing of $103 per kilowatt. and with a higher average lease term of 9.7 years, reflecting the mix heavily weighted toward this segment. Over the trailing 12-month period, our bookings have totaled 15% of our base revenue. This indicates that we are still generating strong top-line growth, net of the impact of churn, despite having a much larger business than we did a few years ago. As of the end of the quarter, 51% of our total revenue was from hyperscale customers, and 49% was from enterprise customers. Turning to slide seven, our interconnection revenue was up 10% in the first quarter. In the bottom left-hand corner of the slide, we've highlighted some of our key portfolio metrics. including the NOI contribution of 92% from owned facilities. In addition, we have a relatively young portfolio, a high-quality customer base with nearly 80% of revenue coming from the Fortune 1000, and long-term leases. As the right-hand side of the slide shows, we continue to make good progress on ESG initiatives. which, as we have discussed before, is an area of focus for all of our stakeholders. We recently announced that our Carrollton location in the Dallas area will be our second net positive water data center, following the announcement of our Phoenix location as a net positive water data center last year. Water efficiency projects resulted in a two-thirds decrease in water consumption at our Carrollton facility in 2020, and we continue to take steps toward the further conservation of one of the most important natural resources. Moving to slide eight, I want to highlight our U.S. leasing results, since discussing this is an area of emphasis on our third quarter 2020 call, given our loss of market share over the last few years. During the last two quarters, we have averaged approximately 24 megawatts and just over $33 million in annualized GAAP revenue signed, up over 100% compared to the prior four-quarter average. Nearly 60% of the leasing during this period was with hyperscale customers, including 78% in the first quarter. Not surprisingly, These customers are deploying in our key hyperscale markets, notably Northern Virginia and Phoenix. Importantly, we have capacity across our locations to accommodate larger deployments, and our ability to deliver technical solutions to meet specific customer requirements has contributed to the strong recent performance. While European leasing in the first quarter was softer than it has been in recent quarters, we continue to have productive discussions with our hyperscale customers about potential opportunities in these locations. One of the benefits of having a broad and diverse portfolio with a presence across the key data center markets in both the U.S. and Europe is that we are less dependent on any particular market for leasing to drive growth. Overall, we continue to be encouraged by the demand we are seeing, particularly from hyperscale customers. And it is our job as a team to convert this demand into signed leases. Turning to slide nine, as I mentioned earlier, we are excited about the execution of an agreement to acquire a 12-acre development site in Frankfort. This will give us 63 megawatts of additional power capacity to continue to grow in one of the strongest data center markets in Europe. More broadly, we have shell and land inventory across key locations in the U.S. and Europe to respond to demand as it materializes. This represents more than 1,000 megawatts of total potential incremental power capacity and would more than double the size of our footprint. Our development capabilities allow us to bring online significant capacity quickly throughout our portfolio, including the scale builds that are required by hyperscalers. As the slide shows, we have delivered 529,000 co-location square feet and 95 megawatts over the past 12 months. Our strong balance sheet with substantial available liquidity gives us significant capacity to fund developments at a relatively low cost of capital. In closing, the demand environment remains strong, and we are well positioned to capitalize on opportunities across our markets. Before I turn the call over to Catherine, I want to remind you that we will be hosting our Virtual Investor Day on June 16th. I and the other members of the senior management team look forward to reviewing industry trends, our business, and our strategy, and we hope you will be able to attend. So please RSVP and get that on your calendar. With that, Catherine will now provide more color on our financial performance for the quarter and an update on our guidance for the year.

Catherine? Thank you, Bruce. And good morning, everyone. Continuing with slide 11, Please note that our first quarter results were significantly impacted by winter storm Uri. The electricity rate impact of the storm on metered power reimbursement at our Dallas and Houston data centers was $27.8 million. This was the main driver behind the 21% increase in revenue year over year. As you know, this is a zero-margin pass-through cost that increases our revenue but dilutes our margin. Adjusted to exclude the storm impact on metered power from both revenue and property operating expenses, our NOI and adjusted EBITDA margins would have been 60.1% and 51.8%, respectively. Additionally, the electricity rate during the storm negatively impacted adjusted EBITDA by approximately $3.7 million. This was primarily driven by the impact of electricity costs associated with full-service leases at our Texas data centers. For these leases, power is not billed as a pass-through. This adjusted EBITDA impact was largely offset by the receipt of lease termination fees and the reversal of a property tax accrual, which combined total approximately $3 million. As a result, after adjusting for one-time items, including the negative impact of the storm and the positive impacts of the lease termination fees and the reversal of the property tax accrual, Adjusted EBITDA would have been slightly higher than reported adjusted EBITDA. As we had indicated in our last quarter's call, we expected churn to be more heavily weighted towards the first half of this year. In the first quarter, churn was slightly elevated compared to recent quarters at 1.8%, with the majority driven by customer exits and footprint consolidations. We continue to anticipate that full-year churn will be in the range of 4% to 6%, with second quarter churn higher than churn in each of the last two quarters of the year. Moving to slide 12, the revenue contribution from our European markets continues to increase as leases in our backlog commence. As of the end of the quarter, Europe represented approximately 13% of our portfolio, up from 11% as of the end of the fourth quarter. We expect that this trend will continue given the significant proportion of leases across these markets in our backlog and the growth opportunity in Europe relative to the current size of our business there. During the quarter, we exited our Stanford Omega facility which was a very small leased facility consisting of 19,000 square feet of office space and no collocation space with annualized rent totaling approximately $300,000. We elected not to renew this lease at the expiration and most of our customers at this facility were migrated to our Norwalk location. Total collocation square foot capacity across our portfolio grew by approximately 12.5%, primarily driven by demand in Europe as well as key U.S. markets such as Phoenix and San Antonio. Slide 13 provides a snapshot of our development pipeline as of the end of the quarter. with projects across nine markets in the United States and Europe. We have approximately 380,000 collocation square feet and 100 megawatts under development, with a relatively even split domestically and internationally. The collocation square footage under development is 69% pre-lease. It's up from 50% at the end of the fourth quarter. meaningfully de-risking our capital investment. Upon completion of this project, our portfolio will consist of nearly 1,000 megawatts of power, with our European markets representing nearly 20% of that total. Since last quarter, we have begun development of 102,000 square feet in northern Virginia and 62,000 square feet in Phoenix, in response to strong demand in those markets. Turning to slide 14, our credit profile remained strong, with net debt to adjusted EBITDA of 5.6 times, excluding the impact of $385 million in available forward equity. At the end of the first quarter, we drew down approximately $95 million in equity, issuing approximately 1.4 million shares. We expect to draw down the remaining available forward equity in the coming quarters to fund our development, meet our settlement obligations, and manage our leverage in our targeted mid to upper five times range. Slide 15 shows the expected commencement timing for leases signed during the quarter. as well as our overall backlog, which consists of a record $113.3 million in annualized GAAP revenue. We expect that nearly $64 million will commence over the next two quarters. Of the remaining amount, nearly $50 million is expected to commence in the fourth quarter and beyond. As noted at the bottom of this slide, Approximately 26 million relates to the lease that we have discussed in prior quarters, where the customer is deploying 4.5 megawatt blocks annually through mid-2026. Of the remaining 24 million, approximately 5 million is expected to commence at the end of this year, with 19 million anticipated to commence in 2022. weighted towards the second half of that year. Moving to slide 16, we are increasing the lower and upper ends of the guidance ranges for total revenue and metered power reimbursement by $30 million to account for the impact of the storm in the first quarter. And we are reaffirming our other guidance ranges. As you think about modeling the second quarter, please note that you will have the full run rate impact of the elevated churn that occurred in the first quarter, plus slightly elevated second quarter churn compared to each of the last two quarters of the year. Additionally, the lease commencements in the second quarter are expected to be more weighted towards the end of the quarter. And lastly, you will have the full run rate impact of the additional shares that we issued at the end of the first quarter. In closing, the team is focused on consistent and disciplined execution across all areas of our business to ensure that we are well positioned to generate profitable growth. The secular demand trends that have benefited us in the industry are expected to continue in the coming years, providing a strong foundation for us to create significant value for our shareholders. We appreciate you participating in our call, and we're now happy to take questions. Given the number of people in the queue, we kindly request that each person asks one question so that we can stay on schedule and conclude the call on time at noon Eastern. Thank you. And Nick, please open the line.

We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. This time we'll pause momentarily to assemble the roster. First question is from John Atkin of RBC. Please go ahead.

Um, thanks very much. Um, so I was just interested in the, uh, the analyst day and, uh, Bruce or, or Catherine, if there's anything more you might be able to give us in the way of preview, you know, topics that you're going to explore, whether it's strategic financial or operational in nature. Um, and then, um, had a, a question about Europe. You mentioned productive discussions. I wondered if there's, uh, any way that you can characterize, you know, kind of the late stage pipeline for anything hyperscale related, as well as the Frankfurt land parcel. What part of Frankfurt is that, if you are able to share that? Thanks very much.

Great. Thanks, John. In terms of Investor Day, again, we think it would be a great opportunity to spend some time and for you to spend time not only with me and Catherine, but with the rest of the senior management team to hear about sort of our thinking in terms of the business, thinking about how we're thinking about recycling, thinking about in terms of what we think sort of metrics that we're going to be looking at and things, changes, and how we think about goalposts, that is, what we think is achievable. It's not going to be guidance, but over the next two, three, four years, what the goal is. So we think it will be a good discussion, and we look forward to it. So, again, we hope everybody will join us for that. In terms of Europe, again, Europe was very light in the quarter in terms of signed bookings, but we're very encouraged, as I said in my remarks, about business over there. There's good demand. We've got a great team over there, and we're working hard on things. Nothing to report, but we're encouraged by business.

And I would add, John, good morning. First of all, in Europe, most of our demand is hyperscalers. And as you know, the hyperscalers don't really work on the quarter-to-quarter business. So our discussions with the customers are very active, and it's just a lumpy business.

And as to location, when we get to Investor Day, hopefully this is our – We will close. We'll tell you where the location is. But right now, since it's not closed, we'd rather not talk about it.

Thank you for that. And then just on the follow-up, and so it sounds like multi-year outlook, would that be for revenues, EBITDA, FFO per share, anything that you're kind of thinking around the type of outlook that you would provide?

Yeah, so we'll consider the framework of key metrics, and that would help you understand how we run the business and how we see the growth, and especially profitable growth, top and bottom line, John.

But again, it's not guidance, but just sort of the goalposts in terms of what we think is achievable.

Understood. Thank you.

Thank you. The next question is from Ari Klein of BMO Capital Markets. Please go ahead.

Thank you. I was wondering if you can give some color on the markets where hyperscale leasing was done in the U.S. And then you talk about some of the go-to-market changes a few quarters ago. How have you seen that play out in the pipeline?

Sure. Ari, I would say, again, if you look at the quarter... In terms of the hyperscale demand, in terms of signing the leases, Phoenix and Northern Virginia were basically neck and neck, and Phoenix just edged them out a little bit, and then Dallas was a distant third. But, again, we're seeing great demand there. In terms of as we look forward, I would say that we have a great team that's focused on this, and we've got great product, and we've got availability, and we're encouraged by what we're seeing in terms of demand. And, again... It's up to us to execute and bring home the signed leases, but we're encouraged.

Ari, in Northern Virginia and Cinex, in particular those two markets, we have a line of sight to 100 megawatts or so of capacity. So those are the very key markets for us.

Great. And then just on the rate increases, utility rate increases, obviously unexpected. Has there been any pushback from customers on that? We haven't seen that kind of impact from some of your competitors. And obviously, we hope this was a one-off event, but is there anything that you could do differently to prevent these kind of surprises?

Yeah, so let me take this. First of all, we are in the very close discussions with the customers as well as with the utility providers that provided our power to our sites. And in terms of pushback, I think it's a collaborative effort with our customers. For us, this is a service that we provide for them, for the immediate power reimbursement customers. And for all in customers, it is included in their rate. So as we disclosed, we've incurred $3.7 million in cost charges from that portion of our business. Going forward, we have to see how the power and commodities develop in the market, specifically in the state of Texas and broader, and we will manage this accordingly with our customers.

Got it.

Thank you. Thank you. Next question is from Richard Cho of J.P. Morgan. Please go ahead.

Hi, I was wondering if we can get a little more color on the hyperscale business that you're signing in the U.S. Is it coming from one or two customers, or is this from multiple customers over the past few quarters? And what does the pipeline going forward look like? Are you talking to multiple cloud providers? Thank you.

I would say in terms of there's great demand by a number of customers. So, you know, again, we're encouraged by that in terms of, We really don't discuss pipeline in terms of the funnel and that. But, again, as I said in our remarks, we're very encouraged by what we're seeing in the marketplace, and it's up to us to deliver solutions to customers and get leads assigned. But, again, the demand is out there.

Great.

Thank you.

Thank you. And the next question, Eric Rasmussen of Stateful. Please go ahead.

Yeah, thank you. Maybe, you know, bookings eased off somewhat from Q4. Maybe if you just comment on the types of deals the team is tracking and maybe how that plays into potentially better leasing throughout the quarter. And with that, you know, do you see, you know, Northern Virginia and Phoenix still playing key roles in that?

We do feel Northern Virginia and Phoenix continue to play strong roles going forward for us. We also think Europe will continue to be very strong for us. It was an off-quarter for us in Europe, but despite that, $35 million is a very good number in terms of sales, so we're very happy with that. But again, as I said, demand is good, and it's in the U.S., it's in Europe, and... And we're encouraged. But, again, it's up to us to deliver.

Yeah, Eric, and just to that, too, I mean, the demand is diverse, right? It's enterprise, it's hyperscale, and it's us providing that line of sight for both types of those customers of scale and ability to execute. And that's really what drives those signed leases that Bruce is talking about.

Mm-hmm. In terms of the first quarter, just to clarify, the 79% of our mix of orders came from the hyperscale customers.

Okay, great. Thank you.

Thank you. And the next question is from David Barrow of Ring Street Advisors. Please go ahead.

Hey, thanks, guys. Question for you, Bruce. If you like the European data centers, companies, there's a new one that's popping up every week focused on development. So I'd love to kind of get your views on how long you think outsized development profit margins in Europe will persist before we just start to see, I guess, new supplies start pressuring African rents.

All right. It's a good question. I would say, again, Europe, we like Europe. We continue to like Europe because it's harder to find products. It's hard to get the land. It's hard to get the power in zoning. So you have it. It's special. That being said, you know, it's competitive over there. But it's up to us in terms of find the right sites that our customers want. And if we can do that, we think we can do, you know, get decent returns. But there's no question in our mind that returns are coming down. And so over time, I think they will come down to more in the U.S. in terms of rates. Not rates, but returns.

That's helpful. And then I guess just on the demand environment, maybe for hyperscale data centers outside of the top markets in Europe, could you maybe talk about that and what the company's, you know, I guess appetite or how comfortable they are shifting capital outside of some of the top markets?

Well, we'll talk about that and investigate. But I would say this, in terms of going to markets, if we're going to new markets, we want to make sure that we have a, you know, we want to de-risk it if we can and to have it pre-leased. with a customer or, you know, a substantial, you know, line of sight to leasing. And we're really not going to talk about specific markets until we're in them. But, again, we think that over time we will go to different markets, but we'll talk more about that on investor day.

Great. Thanks for the call there, Rene.

Thank you.

Thank you. Next question comes from Colby Sinusel. Colin, please go ahead.

Great. Thank you. I was wondering if you just gave us an update on the Dublin market. You guys have a presence there, but can you just remind us what's actually been built? And just broadly speaking, what you would describe the demand environment to look like up there. And then secondly, I'm just curious if there's been any changes to sales compensation structure to go to market strategy of late. And if so, if you can give us some color on what might have happened and why. Thank you.

Hi, Colby. It's Catherine. I'll take your second question first just because, as you know, every year at the beginning of the year we look at compensation in terms of targets, and it includes our sales compensation as well. There hasn't been any – substantial changes to the sales plan. It was more of a tweaks of the nature. And so with that, we haven't really seen any impact on our sales organization. So it's been pretty stable team, very engaged team, and they're going after our sales funnel. As you see, our leasing continues to be strong. And in the first quarter, it was at 35 million. Now, in terms of Dublin, as you know, it's a self-built market, but we do have presence there and are working to develop that. And today, if you remember under development, we have 76,000 collocations square feet, which equates to approximately 12 megawatts. And we'll keep working in this market.

It's out of construction. It should be completed, you know.

Thank you.

Thank you. And the next question is from Frank Walton of Raymond James. Please go ahead.

Great. Thank you. I wanted to talk about sort of your future rents. Are you facing any material rent roll-downs you expect to release? And what are the rates coming? And what are you looking to underwrite to with lease renewals going forward?

I guess I'll take that since it's one of my favorite topics that relates to the renewals and rent roll-downs that we don't normally disclose, but we're working in a broader framework of our metrics and how we think about it. What I do want to point and guide you to is how we think about the churn and specifically elevated churn this quarter came, as I mentioned in my prepared remarks, came from footprint consolidations in some customer exits. The renewal basis during the first quarter was very immaterial, so it's not really substantial to talk about roll-downs in this quarter. But as we go further in the year, there will be some more renewals that are coming to play, and we'll talk about it then.

Okay. Thank you very much.

Thank you. The next question from Erica LaFleur of Wells Fargo. Please go ahead.

Great. Thanks for taking the question. So obviously, pricing came down a bit on a per kilowatt basis due to your mix this quarter. But maybe you could just give us some color on what the returns on capital were with that average deal pricing just north of $100 per kilowatt. And then kind of related to that development yield discussion, what are you seeing today in terms of your average cost to build in the U.S. specifically? Have you been able to stay around $7 million per megawatt in some of your more mature markets? Or are there any impacts from kind of cost inflation, higher land prices that may be could drive those development costs a little higher. Thank you.

Let me take the first, and then John can talk about construction. I would say in terms of the yields that we're seeing, they're consistent with what we said before in terms of the 8 to 10 percent, you know, stabilized yields over the term. So, again, we're pretty encouraged about that. And the nice thing about This business is, in terms of the hyperscalers, it's the long-term leases. The 9.7-year term is very good about in terms of that. But the yields are, Eric, within the range we talked about.

Yeah, Eric, it's John here. Nice to talk to you. So firstly, I mean, our construction costs are in line, right, with market, right? And it drives to what Bruce is saying, keeping those yields in place. We're always looking for efficiency around that build cost like we always have. to build the right product for our customers. So that's in line. As far as commodity pricing and inflation on that stuff, we're not seeing anything impacting us today. We are constantly looking at it. We're locked in on our equipment pricing until the end of this year. And we've always had a diverse kind of focus when we think about shell construction and we think about steel versus FRP. We look at all those things all the time. and we'll just pick the right product for the cost metric we're trying to achieve.

Great, thank you. Thank you. The next question comes from Jordan Sadler of QBank. Please go ahead.

Thanks, and good morning. So I wanted to touch on Europe for a second. I know this was a lighter quarter there, but trying to gauge total availability in terms of what you really have available to lease right now. The development pipeline, broadly speaking, is I think a high 60% is leased. But if we focus in on Europe, how much availability is there?

We've got a bunch. If you look at London, we've got London 4 and 5. We've got a little...

little bits and some of the other projects but in terms of total I would say we've ended up Michael what would it be yeah probably across all the markets will be over 100 megawatts and then if you add our development pipeline to it which is 45 megawatts plus we have the land that's also we're just in the process of acquiring and plus the land that we acquired in the last year. So we have a good runway in Europe, and we're really positive about it.

I guess, are you speaking to not yet commenced development, largely? Because I look at Frankfurt, it's 90% leased, 252,000 square feet of colo space. I see London's 148,000 feet of colo, you're 83% leased.

amsterdam's fully leased that's your stabilized portfolio and then you know among your development portfolio you've got 45 megawatts of total uh develop you know under development in europe listed 45 yeah jordan i mean we should i think we're going to dive into this and we're an investor day but i mean amsterdam's a perfect example we have four and a half megawatts built out there there's three megawatts leased the shell that's standing there's a 27 megawatt shell right so this is how do we turn that capacity into leasable capacity quickly, right? So key is, where do we have land and shell? That's what Catherine was speaking to. Plus, we have additional land in Amsterdam for another 27 megawatt shell. So there's kind of that combination between land capacity, shell capacity, and built capacity. And they kind of fall into all different buckets, depending on how soon we could execute on those.

You've picketed over 100 megs, basically. Yes, yes. Okay. And then one other question just on coming back to sort of maybe metrics. Bruce, what's your thoughts on, I mean, you've had sort of nearing a year looking at this business and spending time on this business. What are your thoughts on sort of offering up leasing spreads?

You know, offering up leasing spreads on renewals, leasing spreads on.

Yeah.

I think we're going to talk about in terms of investor day, sort of how we look at churn and how we look at that. So I think, you know, we're going to talk about that. So make sure you show up.

I'll be there. And then what about your escalators on that 9.7 years leases?

We don't talk specific leases, but if you look in general with our leases, we have about a 2% escalation on all of our leases.

Okay. And you're still getting that?

Yes. But that's a combination of hyperscale and enterprise in terms of it averages to about 2%.

Okay. Thank you.

Thank you. And the next question is from Tim Long of Barclays. Please go ahead.

Thank you. I was hoping to ask about kind of what you're seeing on the enterprise side of the business. I guess leasing looks like it was down a little bit quarter on quarter. Just give us a little color kind of what you're seeing on the pricing front. and any verticals that are coming out better or worse and maybe a little bit on pipeline as we get to reentry. Do you expect to the office, do you expect to see more new logos in that business? Thank you.

Michael, do you want to take that? Yeah, sure. So as Bruce mentioned in his remarks, we had a really strong fourth quarter among enterprises with $20 million signed, a little bit lighter in the first quarter relative to what we've seen historically in a function of that. But we remain encouraged by what we're seeing in that segment. It's across verticals. It's across markets. And we feel good about it. The pricing, Tim, varies by deal, right? I mean, the bigger the enterprise deal is, the pricing is going to reflect that. So there's a wide variety of deal sizes out there, which impacts the pricing. In terms of new logos, I think You know, we've been relatively consistent in terms of what we've brought in over the past few quarters. It's been a little bit lighter than what we had brought in in prior years, but I think once we get on the other side of this pandemic, we'll probably see an increase in the number of new customers we're able to add.

Okay, thanks. And just to follow up, it sounds like, you know, decent growth in InterConnect, but still small in a lot of the new leases. So could you talk a little bit about what you think as far as you're getting the new customer growth but volume growth for that business to become more meaningful? Thanks.

Yeah, I mean, we've always viewed interconnection as an enabler of our co-location business. And really what we're seeing now is what we've seen historically. It's a growth in cross-connects as we're building these ecosystems within data centers and then customers, enterprise customers particularly, taking advantage of interconnection. the SDN offerings with Megaport in particular, and that's what we expect to see going forward. The revenue this quarter was impacted. We had a prior period credit for a customer that impacted revenue. We had a little bit of churn, but again, we're viewing interconnection as we always have as an enabler of our co-location business.

Thank you.

Sure.

Thank you. Next question is from Nick Balbo, Moffat & Atkinson. Please go ahead.

Hey, thanks for taking my question. Are you guys observing any change in the propensity for the major hyperscalers, insource versus outsource? Or does your market intelligence and customer conversation suggest any changes on that front? Or is this kind of the usual ebb and flow?

Yeah, I think it's the usual ebb and flow. I mean, it all depends in terms of if they have time and they'd love to do it themselves, in terms of if we have the right site and there's a demand, then we're providing a solution for them. And we think that continues in terms of we help provide solutions to them. As long as we can keep doing that, we think that's a great business for us and for them. So we're pretty encouraged.

Anything, John? Yeah, Nick, I mean, I think, you know, for especially the large hyperscalers and, you know, even some of these enterprises at scale we think about, I mean, people who would do their own versus lease with us, they view us as an extension of their team, right? They have a demand that they need to hit for their cloud business or whatever their business is, right? And leasing is a lever that they use, right? And they want to lease with people who are going to deliver, you know, execute on the project, hit the sustainability goals, hit the safety goals. I mean, it's... It's not an easy business, right? And it takes an army to do that, and they expect you to perform just like they do, right?

So... Or better.

Or better, right? Or better. Sure, better. Yeah, better. Sure, better.

All right, well, thank you. Thank you. The next question is from Jeff Cavall, Wolf Research. Please go ahead.

Yes, thanks very much for taking the question. A couple quarters ago, you adjusted the yield targets that you were hoping for in the long term. And I guess I'm wondering to what extent that is reverberating in the marketplace and how long that effect will be with you. Will you start to lap that at some point or will it reverberate for a couple years perhaps?

Yeah.

And I guess a second side point that you introduced a moment ago, I think, sounds like you were a little worried about the European pricing more so than the U.S., which is holding up, but it also suggested as though you, and I may have misinterpreted this, but it sounds as though you thought that the U.S. pricing actually may harmonize with the Europe pricing over time.

All right, well, let me be clear. Number one, as it relates to the U.S., when we went down to the 8% to 10%, threshold in terms of our view of what yields are acceptable for us. We weren't doing that to lead the market. We were doing that to meet the market. That is, the market was already there. So we did that. We also, in terms of, I think that brought us in the market. I'd say also, in terms of we had capacity, we developed the capacity for our clients that we had in the markets like Northern Virginia, Dallas, and in Phoenix. So I think that's helped. So we're very encouraged by what we're seeing there. In terms of yields, there are, you know, rents are higher in Europe, but costs are higher in Europe. So you've got to factor that in. In terms of the overall yields in Europe, they've traditionally been higher than the U.S., but I do think over time that those have come down some. But the pricing is higher in Europe than it is in the U.S. because the costs are much higher.

Okay, thank you. And then just to follow up on that, yields to 8 to 10, how long will that – be visible in the financials? Is this something that works its way through the system in two or three quarters, a year, or does as renewals come up, is this kind of the new benchmark that we'll look to?

I'm not sure what you're saying, but I would say, again, in the yields that we're getting people in there in like 16 weeks, you're going to see that they're in there. Some of these are developments that will take longer And if it takes longer, it'll show up in a year or so. But go ahead, Catherine.

Yeah, and Jeff, if you go back a year ago, I mean, when we had our yield expectations in the mid-teens or so, and we passed on some of the deals. So new business was impacted by that. And as Bruce pointed out, we were going at the market. We were not leading the market when we lowered our yields 8% to 10%. So this is the market expectations for business, and that drives the pricing in the marketplace. And we are able to be competitive at that level. because we're still, with our structure, are able to generate same double-digit returns on equity because of the leverage and the cost of debt that we have.

Yeah, just to follow up on Catherine's point, if you look at it, you look at our, and you say you're doing a 9% deal, all right, and you use our leverage at 5.8 times and you assume interest rates at 3%, What that means is your return on equity, on the equity you're putting in, will yield a 15%, 16% return. And so it's a very attractive, you know, return for our investors, we think. So, again, and that's at a 9%, not 10% range or whatever. So we think it's a pretty attractive return still.

Thank you both.

Thank you. Next question from Michael Funk of Bank of America. Please go ahead.

Yeah, hi, good morning. Thank you for the questions. First one's on the commencement timing slide. I think it's slide number 15 on the deck. And I know it's hard to compare quarter over quarter, but it does appear the commencement's got pushed back more to the second half of 2021. So I hope you could comment on that. And if that assessment's correct, maybe comment on what's pushing out the commencement time. Is it customer behavior? Is it your ability to provide the space? What's providing that change?

Michael, relative to the commencement timing that we had provided last quarter, there wasn't a significant shift. I think maybe a couple million dollars here and there, but that's normal because we're estimating and we update our estimates every quarter. But there was not a significant shift this quarter in our expectations relative to last quarter.

And also, I would point out the fact that the leases that we signed this quarter, the $35.4 million, are all expected to commence within the four quarters.

Great. And one more if I could. Bruce, I think you mentioned when addressing the endless day, you know, business and then recycling, I think you mentioned, I'm assuming that you don't mean ESG, that you mean asset sales. If that's correct, you know, can you give us a highlight of what types of assets, what could you recycle, you know, timing for that? You know, CBR reported that they saw a

I would love to give you all that information, and you just tune in June 16th. We look forward to it.

Great. Appreciate it.

Thank you. Next question comes from Simon Flannery of Morgan Stanley. Please go ahead.

Great. Thank you. Good morning. So nice to see the 69% pre-lease space. How are you thinking about your focus on making sure you have enough space in some of the hotter markets like Northern Virginia and Phoenix. Is there any plans? How high will you let that run before you start planning the next phases?

Simon, it's a very good question. Again, we look at it to see the demand because we want to make sure we have capacity. So You know, we're looking at that because there is great demand in both of those, both Northern Virginia and Phoenix. So we're looking at that and making sure we're going to have capacity available.

Okay. And then what about new markets, either in the U.S. or in Europe? There's been a lot of talk about, you know, the focus of customers on these sort of second, third-tier markets as the edge becomes more important. Do you see opportunities there?

I would say on the edge, it's not going to be our primary focus. I would say that, you know, we've got a big development site in Santa Clara. John and I will talk about that. We're very excited about.

Yes, Simon, nice to talk to you. Yes, Santa Clara, we're looking for our entitlements to be done by the end of the year there. So, I mean, that's a That's a high barrier to entry kind of market, so we're really excited about that. And I think just a big project. It's a huge project. Yeah, yeah. So 70 megawatt project there. And, you know, one of the hyperscale markets we're not in, right, that we're looking forward to getting into. As far as the second and third tier markets, I think Bruce mentioned it. Like, that kind of stuff's going to happen with an anchor at scale, right? If we have an anchor to go into that market, well, you know, that's when we'll look at that stuff. Great.

Thank you.

Thank you. The next question from Sammy Badry, Credit Suisse. Please go ahead.

Hi, thank you. I just have a couple. Catherine, maybe the first one for you regarding the customer that you saw consolidating their footprint. What industries were those customers from or verticals?

Hi, Sammy. So you're referring to the churn that we had customers exiting and consolidating footprint. It's across a couple. It's not one specific customer, so it's across the verticals as well. And it happened actually in the Dallas market, and so we already have new demand for that space that we're looking into. Okay.

Okay, got it. The other question I had was you guys signed now MRR per KW at 103 per KW in the quarter. And when you compare that to just the last quarter, even just year on year, that's down quite a bit. Now, the reason why I kind of just want to understand this 103 number a little bit better here is that you've laid out an 8% to 10% return target. Is 8% to 10% achievable at 103%, and what if this 103% dips down to, say, 95%? Is 8% to 10% still achievable?

It is achievable. Remember, the reason it's 102% is because of the mix. The mix was all hyperscale. Last quarter, it was like 133% because you had the enterprise with it. It's also in the U.S. versus in Europe, and rates are lower in the U.S. than Europe. I would say at the rate, at the 102, we have very good returns. I said earlier that 103, we're in the range of the 8% to 10%, and it's a very good return on a leverage basis.

Yes, so we underwrite our deals to that yield of 8% to 10%, so the fact that we close these bookings, that means it meets our underwriting criteria.

Okay, got it. Maybe, Catherine, one last question here is for modeling. How much cash do you guys need on hand and on the balance sheet to just keep running the business? And I only ask this because you are straddling different regions now. You have a lot of long-dated development projects taking place. Just how much cash should we be modeling, you know, on a quarterly run rate basis?

Yeah, so actually the way to think about it is there's not a minimum cash that we want to keep on the balance sheet. We have access to revolving credit facilities. We also have a forward equity, $385 million, which we use that as sources to fund the business and the run rate. So if you look at between the leverage and our access to capital and the liquidity of $1.6 billion overall, we're pretty much well positioned to fund the years of development. And then looking forward, we are always considering forward ATM programs as a vehicle to fund our future development.

Sammy, I'd also add to that. Just be mindful that we're operating with three different currencies now. So USD and then in Europe, obviously, sterling and euro. So you have to have minimum levels across those currencies to be able to find, you know, short-term requirements.

Got it, got it. Maybe just, maybe asking this question a little bit differently. Do you guys need $30 million of cash on your balance sheet, or do you guys need more like $150 million of cash at any given quarter on your balance sheet?

Again, so it depends. It depends on any quarter. You've seen our range of cash on hand from $30 million to $200 million. So that's pretty good wide range, but we manage it according to our leverage and funding capacity that we need.

Yeah, and just bear in mind that we did draw down $95 million in equity at the very end of the first quarter, and then we had a dividend payment that we funded, as we always do at the beginning of the next quarter.

Got it. Thank you.

Thank you. Ken, if you have a question, please press star and 1. Our next question comes from . Please go ahead.

Yes. Good morning. So I wanted to focus in on guidance a little bit. You did talk about, you know, the three cents negative impact from the power situation. And even when you kind of back out all the one-time items, you probably would have done a little bit better than your reported number. You have, you know, you're kind of talking about a pretty decent kind of leasing outlook, despite some other concerns around Europe. And your churn is expected to kind of slow going forward. So I guess, you know, when I look at all that, I'm just kind of curious, number one, why guidance wasn't raised and maybe what some of the offsetting factors could be. over the course of the rest of the year to kind of maintain guidance just because it felt like there was some type of momentum from one Q21 results and some of your commentary today on the earnings call.

Thank you. Let me take that, Toyo. So we are staying within our stated guidance because a lot of the – during the first quarter were, as I mentioned in my prepared remarks, were of one-time nature, whether it's a negative impact of storm Uri or a couple of positive events, for example, these termination fees and others. So from that perspective, we do look at our margin, if adjusted for those one-time items, for the remainder of the year, stay in the 50% or so, which is within the range of our guidance. And in terms of the bottom line and the effort to normalize that quote per share is the guidance we also stay within the range because we are raising the equity as we took down $85 million at the end of the quarter. And so we continue to have to take $385 million for the remainder of the year. So you kind of be mindful of that within our stated guidance.

That's helpful. Thank you.

Thank you. We have no further questions, and I'll turn the call back over to Mr. Bruce Duncan for closing remarks.

Thank you, Operator. Let me conclude with two things. First, if you have any questions, please feel free to reach out to Michael, Catherine, or me. And don't forget to RSVP for our Investor Day on June 16th. And finally, and most importantly, I want to thank my Tyrus One teammates for all their good work this quarter. As a result of your hard work, we're making good progress, and your efforts are much appreciated. You're an extraordinary team, and we thank you for all you're doing to make us better. So thank you all, and thank you for the call. Any questions, call us. Thank you.

Call is now concluded. Thank you for attending today's presentation. You may now disconnect.